The Investment Column: Medeva needs to find a new star

One way to get Bill Bogie, chief executive of Medeva, animated is to enquire just what has happened to his group's share price. Claiming yesterday that he was determined not to moan about the dramatic slump in the value of the group, in the next breath Dr Bogie could not resist complaining that the City has got Medeva all wrong. After all, he argues, when Glaxo Wellcome warned that earnings would be flat for the next few years the shares held up, even before its merger talks with SmithKline Beecham. When Medeva makes a similar announcement the share price collapses.

To some extent the two companies' problems are similar. Glaxo's star ulcer treatment, Zantac, is coming off patent, while Medeva faces the introduction of generic competition for methylphenidate, its main profit earner which is used to treat hyper-active kids.

But Medeva is no Glaxo. By virtue of its size is has nowhere near the number of drugs in its pipeline. Methylphenidate accounts for about a third of sales. Analysts believe sales of the treatment could halve over the next few years.

Prospects now hinge on finding a replacement. Medeva's main hope is hepagene, a hepatitis B vaccine which could also be used to treat the disease. Other new products include a dry powder asthma inhaler and new improved forms of methylphenidate. If any of these come off in a big way, profit prospects will be transformed.

But we will not know until 1999 at the earliest. Until then, however hard the group tries, it is unlikely to make up the shortfall from the lost methylphenidate sales.

Even though Medeva has proved a solid earner, there is a case for it to viewed more like a biotechnology stock. In other words, investing in the shares is a simple gamble on whether its drug development programme comes off.

That approach ignores the fact that, unlike biotechs, Medeva is actually profitable and producing a reasonable cash flow. That cash flow could support new drug purchases and a 10 per cent share buyback, helping to underpin the share price.

Medeva's 1997 profits rose to pounds 111m, a rise of 7 per cent ignoring exceptionals. But its shares fell 12p to 158p yesterday. ABN Amro Hoare Govett forecasts profits falling to pounds 99m this year, then pounds 107m in 1999, putting the shares on a prospective p/e ratio of 8.5, falling to 8. That looks very cheap compared to the wider pharmaceutical sector that trades on a multiple of at least 25 times earnings. Hold on.